Two 787 Fleets Grounded, As Well As Overnight Optimism

Those who went long Boeing in the last few days on hopes the "smoking battery" issue had been resolved, especially following Ray LaHood comment's he would fly the Dreamliner, which is rapidly becoming the Nightmareliner for Boeing, anytime anywhere, are about to be grounded, as is the entire 787 fleet of All Nippon Airlines and Japan Airlines following yet another incident forcing an emergency Dreamliner landing. This happened after ANA "alarms indicated smoke in the forward area of the plane, which houses batteries and other equipment, the airline said, and there was a "burning-like smell" in the cockpit and parts of the cabin. The plane landed at Takamatsu airport in western Japan, where the 129 passengers were evacuated using the plane's emergency chutes. The plane also carried eight crew members. ANA said that the exact cause was still undetermined. The event was designated as a "serious incident" by Japan's transport ministry, setting off an immediate investigation by the Japan Transport Safety Board, which dispatched a team to the scene." The result - a 4% drop in the stock so far premarket, and if any more airlines are to ground their fleet the implications for the backlog could be devastating, it will only get far worse for both the company and the Dow Jones average, of which it is part.

Elsewhere, as we already reported, Germany cut its 2013 growth outlook to 0.4%, down from 0.7% in 2012. However, while Juncker yesterday launched the first shot of verbal intervention in an attempt to keep German exports strong, today ECB's Nowotny confirmed that the confusion in Europe is as prevalent as ever, following remarks that the "panic in markets over the EUR is over, and the exchange rate is not a matter of major concern", which pushed the EURUSD higher by some 50 pips. While these remarks directly negated Juncker's, they also made sure that the export-growth driven Germany's recession is here to stay as every yard higher in the EURUSD means, several German GDP ends up several ticks lower. Pick your poison.

In other news the earnings season revs up a gear today as JPMorgan and Goldman Sachs kick off the reporting season for the US investment banks (before US market open). This should set the tone for the rest of the banking sector who report over the following few days including Bank of America and Citigroup tomorrow and Morgan Stanley on Friday. For the record, the market is expecting EPS of $1.22 and $3.66 for JPM and GS respectively. Importantly though, in recent months Q4 expectations themselves have been raised by around 7% and 18% for JPM and GS respectively, according to Bloomberg data. Indeed, expectations for the broader financial sector as a whole are high, with the financials industry sector rallying more than 13% since the lows in mid-November (vs a 8.7% gain for the broader S&P500).

Deutsche Bank's recap continues: In terms of yesterday’s US session, it was a day of two halves as a weaker-than-expected Empire Manufacturing print (-7.8 vs 0.0 expected) and another 3% drop in Apple set the scene for a weak open. From there, the S&P500 managed a 0.6% intraday rally to close with a gain of 0.11%, taking the benchmark to a new postfinancial crisis high of 1472. Driving the rally was a better than expected retail sales number (+0.5% vs +0.2% expected) which as our US economists point out, came amidst a recent spate of weaker consumer sentiment indicators including the UofMichigan (72.9 Dec vs. 82.6 Oct) and Conference board surveys (65.1 Dec vs. 73.1 Oct). Indeed retail stocks (+0.75%) outperformed on the day led by JC Penney (+3.4%), Tiffany’s (+3.3%) and Macy’s (+2.2%) – helping to offset another weak day for telecoms (-0.9%) and technology stocks (-0.6%). While on the topic of technology, Apple had its second consecutive day of +3% losses. Its stock price closed below $500/share for the first time since February 10th 2012 and is now about 31% below the all-time peak of $702 reached in mid-September 2012.

Across the Atlantic, the head of Fitch’s sovereign ratings team reiterated that another last minute US budget deal isn't consistent with a AAA rating, and the "self inflicted crisis" will put into question the predictability and reliability of US fiscal policy. The agency also said that the risks of the UK losing its AAA rating are increasing, adding that the Treasury's Autumn Statement that it would miss its 2015-16 target to start cutting the level of net debt had weakened the Treasury's "credibility".

In an interview in the FT, PM Rajoy said that his government’s reform programme will begin to bear fruit in the form of an economic recovery later this year, and will “come through very clearly in 2014”. Rajoy also called for expansionist policies from countries that could afford it, probably referring to Germany. Mr Rajoy also insisted that Spain was right not to request aid from the ECB last year - and ruled out any such move for the time being. Mr Rajoy suggested he would only consider OMT in the event of fresh market turmoil. "The option is there, and it would be absurd to rule it out for all time," the PM said. (FT) Turning to overnight markets, most Asian markets are trading with a weaker tone paced by losses on the Hang Seng (-0.22%) and Shanghai Composite (-0.56%).

The Nikkei (-2%) is underperforming broader regional markets, despite better than expected November machine orders (+3.9%mom vs +0.3% expected), partly driven by profit taking following four straight sessions of gains. The JPY is continuing to strengthen across the board following comments on the newswires from the LDP’s Secretary General that a weaker JPY may be of concern for some industries. Staying in Japan, the Nikkei reported that the Abe government will present successors to BoJ Governor Shirakawa and his two deputies around February 15th.

In other interesting headlines, the EU’s Jean-Claude Juncker said that Euro’s recent rise against major currencies had resulted in an exchange rate that was “dangerously high”. The comment drove a late selloff in EURUSD (-0.57%) yesterday, although it remains about 1.7% higher than before the ECB’s meeting last Thursday. On the topic of central banks, Boston Fed President Rosengren said that the Fed could enlarge asset purchases if it were to become necessary. He highlighted that the Fed would want to see about a 0.5ppt drop in unemployment before it would begin to decide whether to halt purchases.

Turning to the day ahead, the German government is expected to publish its annual economic report that is reported to revise down the country’s 2013 growth estimate to 0.5% from a previous estimate of 1% (Reuters). Eurozone CPI, Italian trade data for November and a German 10yr bund auction are the other highlights of today’s European calendar. In the US, December CPI, industrial production, the Fed’s beige book and the NAHB housing market index are the main data releases. But all eyes will be on the JPM and GS results which are due at 12 noon and 12:30pm London time respectively.